Mexico to cut rates after FOMC: analysts

The Bank of Mexico’s interest rate cut earlier this month is likely the beginning of an easing cycle, analysts say after Wednesday’s US Federal Open Markets Committee meeting

The US Federal Reserve’s decision to continue
quantitative easing at its current pace makes it more likely
that the Bank of Mexico will cut rates at its next meeting,
market analysts say.

Banxico surprised markets by cutting interest rates by 25
basis points at its meeting earlier this month. Rates in Mexico
are at a historic low of 3.75%.

The chance of another rate cut at the October meeting "rose
meaningfully" after another market surprise — the
Fed’s decision on Wednesday not to taper its $85
billion monthly QE program — Alberto Ramos, head of
Latin America economics at Goldman Sachs, said in a note
published Friday.

"We believe the domestic growth-inflation balance of risks
supports another 25 basis point rate cut at the October 25
meeting, but we also acknowledge that global drivers and their
potential impact on the Mexican peso and capital flows adds an
extra layer of complexity and hawkish considerations to the
decision on the optimal current monetary policy stance."

Minutes of Banxico’s September meeting showed
that two of the five directors did not support the rate cut.
One opposed the decision on the grounds that it was better to
assess the market reaction after the Fed’s
meeting.

"The post FOMC rally in emerging markets assets and the
appreciation of the peso to the USD should have eased
significantly the concerns of the dovish dissenting director
that saw merit in cutting but wanted to wait to observe the
market reaction to the FOMC meeting, and must also have
dispelled some of the fears and concerns of the most hawkish
dissenting director," said Ramos.

Analysts at Barclays took a similar view.

"After this decision was made, the very dovish statement
allowed us to believe that this could be the beginning of an
easing cycle and that another rate cut will be implemented in
October 25," said Barclays analysts in a note released on
Friday. "The minutes support this view."

The US
dollar and bond yields dropped, while Latin markets soared on
the news. Stock indices and currencies jumped across the
region, where asset prices have suffered since May when the Fed
first hinted at ending QE earlier.

US growth
numbers were not strong enough for the Fed to begin unwinding
the stimulus. And now, many don’t see the
developed markets able to exit stimulus for some time.

Analysts
expect emerging markets will be buoyed by the news at least
until next month’s Federal Open Markets Committee
meeting, when the central bank will again consider tapering its
bond buying program. LF

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